Written by Fmi.Online Friday January 6, 2023
Earnings before Interest, Taxes, Depreciation, and Amortization, or EBITDA, is a financial metric that measures a firm’s operating profitability.

Explanation :

This metric is a measure of a company’s profitability and strength of operations. In effect, it shows how much cash flow a company generates from its operations. Many investors use this calculation to analyze a company without examining the company’s financing costs, tax burden, and accounting treatments. Since this metric is not a ratio, it’s not used to compare companies of different sizes directly. Also, each company may different greatly from one another when the outside factors are considered. If a company’s EBITDA is negative, it means the business is not profitable even without counting depreciation, amortization, and interest. In other words, it’s in bad shape.

In a nutshell :

  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a metric that measures a company's overall financial performance.
  • In the mid-1980s, investors began to use EBITDA to determine if a distressed company would be able to pay back the interest on a leveraged buyout deal.
  • EBITDA is now commonly used to compare the financial health of companies and to evaluate firms with different tax rates and depreciation policies.
  • Among its drawbacks, EBITDA is not a substitute for analyzing a company's cash flow and can make a company look like it has more money to make interest payments than it really does.
  • EBITDA also ignores the quality of a company's earnings and can make it look cheaper than it really is.
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